Walmart, Inc. (W MT) 16-Aug-2022 - Walmart, Inc. (WMT)
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16-Aug-2022
Walmart, Inc. (W MT)
Q2 2023 Earnings Call
Total Pages: 24
1-877-FACTSET www.callstreet.com Copyright © 2001-2022 FactSet CallStreet, LLCWalmart, Inc. (WMT) Corrected Transcript
Q2 2023 Earnings Call 16-Aug-2022
CORPORATE PARTICIPANTS
Dan Binder John R. Furner
Senior Vice President, Global Treasurer, Tax and Risk Management President & Chief Executive Officer-Walmart U.S., Walmart, Inc.
Operations & Claims, Walmart, Inc.
Kathryn J. McLay
C. Douglas McMillon President & Chief Executive Officer-Sam’s Club, Walmart, Inc.
President, Chief Executive Officer & Director, Walmart, Inc.
Judith McKenna
John David Rainey President & Chief Executive Officer-Walmart International, Walmart,
Chief Financial Officer & Executive Vice President, Walmart, Inc. Inc.
.....................................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Robert Drbul Simeon Ari Gutman
Analyst, Guggenheim Securities LLC Analyst, Morgan Stanley & Co. LLC
Kate McShane Robert F. Ohmes
Analyst, Goldman Sachs & Co. LLC Analyst, BofA Securities, Inc.
Peter Sloan Benedict Rupesh Parikh
Analyst, Robert W. Baird & Co., Inc. Analyst, Oppenheimer & Co., Inc.
Stephanie Wissink Joseph Isaac Feldman
Analyst, Jefferies LLC Analyst, Telsey Advisory Group LLC
Michael Lasser Chuck Grom
Analyst, UBS Securities LLC Analyst, Gordon Haskett Research Advisors
Edward Yruma Ben Bienvenu
Analyst, Piper Sandler & Co. Analyst, Stephens, Inc.
Kelly Bania
Analyst, BMO Capital Markets Corp.
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Q2 2023 Earnings Call 16-Aug-2022
MANAGEMENT DISCUSSION SECTION
Operator: Greetings welcome to the Walmart fiscal year 2023 second quarter earnings call. At this time, all
participants are in a listen-only mode. The question-and-answer session will follow the formal presentation.
[Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to
Dan Binder, Senior Vice President, Investor Relations. Dan, you may begin.
.....................................................................................................................................................................................................................................................................
Dan Binder
Senior Vice President, Global Treasurer, Tax and Risk Management Operations & Claims, Walmart, Inc.
Thank you, Rob. Good morning and welcome to Walmart's second quarter fiscal 2023 earnings call. I'm joined by
members of our executive team, including Doug McMillon, Walmart's President and CEO; John David Rainey,
Executive Vice President and Chief Financial Officer; John Furner, President and CEO of Walmart US; Judith
McKenna, President and CEO of Walmart International and Kath McLay, President and CEO of Sam's Club.
In a few moments, Doug and John David will provide you an update on the business and discuss second quarter
results. That will be followed by our question-and-answer session. Before I turn the call over to Doug, let me
remind you that today's call is being recorded and will include forward-looking statements. These statements are
subject to risks and uncertainties that could cause actual results to differ materially from these statements.
These risks and uncertainties include, but are not limited to the factors identified in our filings with the SEC.
Please review our press release and accompanying slide presentation for a cautionary statement regarding
forward-looking statements, as well as our entire Safe Harbor statement and non-GAAP reconciliations on our
website at stock.walmart.com. It's now my pleasure to turn call over to Doug McMillon.
.....................................................................................................................................................................................................................................................................
C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc.
Good morning, and thanks for joining us.
A few weeks ago, we updated you on our expectations for how we would perform in Q2 and for the year. The
second quarter finished stronger than we anticipated, and John David will touch on that in a moment and provide
more detail for the back half of the year.
Our sales were well ahead of plan with inflation lifting our average transaction size, but we know that the amount
and persistence of inflation is negatively affecting many families. From the US to Mexico to Canada to Chile,
they're prioritizing how they spend their money. We're pleased to see more families from a variety of income
levels choose us as they look for value. Our purpose is to save people money and help them live better, and that's
especially important right now.
After the first quarter, we shared how the environment had changed. The cost of food and fuel, the heavier mix of
sales and food and consumables, and excess inventory and general merchandise categories were among the
most challenging items for us at the time. As we move through Q2, food inflation continued to tick up, and we
continued to see a heavier mix of sales in food and consumables in many of our markets and that put pressure on
margins overall.
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Q2 2023 Earnings Call 16-Aug-2022
Food comps in the US were up mid-teens for the quarter with units in food slightly negative and about flat exiting
the quarter, even with double digit inflation. Another weight on margins has been the number of markdowns we've
taken. Starting back in March, we knew we needed to act quickly and aggressively in some categories and we
have. We've made good progress to reduce inventory levels where we've focused and taken markdowns. The
aggressive approach we took to move through apparel in particular put financial pressure on us, but it helped
relieve pressure on our stores and through our supply chain.
We're making good progress to reduce cost. We've reduced the number of shipping containers in our system, for
example, by more than half from the Q1 level and are now much closer to our historical averages. We're also
managing pricing to reflect our fully-landed costs. The merchants are adjusting by category to reflect where we
expect demand to be.
We had our U.S. store manager meeting last week, and amongst other topics, we shared examples of items
where we're holding prices down or rolling them back. Those tend to be opening price point, private brand food
and consumables items. We want to help families put meals on the table with Great Value and our other private
brands to relieve the pressure they're feeling. The quality, value and convenience we offer makes Walmart a
smart choice, and we're seeing more middle and higher income shoppers choose us.
As I've been in US stores recently, I'm pleased how we've executed back-to-school. As we finish it off in some
markets, we've transitioned to back to college in the appropriate stores with items like mini refrigerators, floor
length mirrors and futons.
In July, I got to visit our associates in India. After visits to Flipkart, Myntra, and PhonePe, a Flipkart fulfillment
center and a kirana to see how they're using PhonePe, I left even more excited about what's happening in these
businesses and what's to come. Having visited several of our International markets this year, I'm pleased by how
connected we are now and how so much of what we're building is common across markets as we scale
marketplace businesses and fulfillment, advertising and financial services and take steps to make a bigger
difference in healthcare.
As I look ahead, I expect a strong finish to the back-to-school season, and we'll quickly transition to the holidays.
Our fall and holiday products look great. There's a lot of newness, and we've got a strong position in opening
price points across categories.
From Halloween to Christmas to Flipkart's Big Billion Days, we'll be ready. We'll have a cleaner inventory position,
and we'll have a strong seasonal presence. We expect inflation to continue to influence the choices that families
make, and we're adjusting to that reality so we can help them more. Regardless of the inflation level, and as we
work through the places we have too much inventory, we continue to make progress on our strategy. We're
becoming more digital, even more relevant as an omni-channel retailer, and the related businesses like fulfillment
and advertising continue to grow. We're building a different business and we're making progress.
Let's move onto our operating segments. I'll start with Walmart US. The strong comps we see in food and
consumables are leading to market share gains. Pickup and delivery are strong. Growth is improving on
walmart.com, including the marketplace, and more people are choosing to be a Walmart+ member or step up to
in-home.
Walmart+ is an important component of our plan, and we announced the addition of a streaming benefit.
Walmart+ members will receive a Paramount+ subscription at no additional cost as part of their Walmart+
membership in September. The premium streaming service offers a broad content offering with original series,
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Q2 2023 Earnings Call 16-Aug-2022
movies, family shows and live sports. We're excited about the coming launch and we know our members will be
too.
Beyond membership, the team is also working on getting items to customers faster while lowering the cost of
delivery through a significant increase in the number of orders fulfilled by stores. We've increased this volume by
nearly 40% from a year ago. Speed matters, whether it's how quickly we get items to customers or how quickly
we scale new businesses.
Our white label delivery platform service, Walmart GoLocal, will celebrate its one year anniversary later this
month. Powered by our Spark Driver platform, I'm excited about the growth I've seen so far and the expectations
looking ahead. We've passed 1 million deliveries so far with GoLocal. We expect to have about 5,000 pickup
locations by year end and client satisfaction scores are strong. We continue to sign up larger-scale customers,
and we're making strides on the bigger unlock, which are small and medium-size businesses. Our technology and
expertise will help so many of these businesses grow while contributing to our operating margins over time.
Advertising is also performing well. In Walmart US, the Walmart Connect team continues to deliver more value to
the suppliers and sellers who advertise with us. Improvements to search and our large first-party shopper data
have led to performance improvements for our advertisers both year-over-year and sequentially. We've seen the
number of active advertisers investing with us increase 121% over last year. Even more encouraging, these
improvements have supported the overall site experience for our customers by helping them find the right
products or discover new ones that are most relevant to them. As you've heard us say before, advertising is a
global priority for us. We continue to see strong growth in markets outside the US like India and Mexico.
Turning to Sam's Club in the US, comp sales were strong again for Q2, up 10%, marking the tenth consecutive
quarter of double digit comp growth. Similar to Walmart, gross profit was pressured for the quarter on higher than
normal markdown activity to clear through excess inventory. We'll continue to make progress as we move through
Q3, and we'll be in good shape as we enter the holiday season. We like what we see in terms of membership.
Total counts are up about 9% over last year, and the penetration of Plus members continues to climb.
Moving onto Walmart International where we performed well again in Q2 with sales up nearly 10%, including
double digit comps in the three largest markets of Mexico, Canada and China. We're also accelerating our digital
businesses including strong eCommerce growth over the last two years. Mexico's up 31%, Canada 32% and
China 152%. We see this growth even as customers choose to do more in-person shopping. It really shows the
power of operating across multiple channels.
Like the US, we see the effects of inflation come through in how people are shopping. In Mexico, we saw all
formats perform well, and Bodega was especially strong with comps above the overall Walmex average. We
widened our price gaps for Bodega by 140 basis points in Q2, and we're seeing more customers shopping this
format. While inflation remains high, most of our markets are growing comps ahead of inflation. I'm proud that
we're helping families access the things they need at more affordable prices.
I'll close today by thanking our associates for all they do every day to support our customers and members. I'd
also like to welcome John David for his first earnings call with us, and with that, I'll turn it over to him.
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John David Rainey
Chief Financial Officer & Executive Vice President, Walmart, Inc.
Thanks, Doug.
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Q2 2023 Earnings Call 16-Aug-2022
I'd like to start by thanking our customers, associates and partners for helping us deliver another strong sales
quarter. We're moving a lot of volume through our business, and I'm proud of how our associate team has
responded in serving customers as we manage through this unique period. We delivered strong top line growth
with total constant currency revenue up more than 9% in the second quarter. Sales were strong across all
segments, particularly in food and consumables. Customers are increasingly choosing Walmart to help them save
money as they deal with broad inflationary pressures.
As we navigate the current environment, we know that we're not immune to large macroeconomic shifts. We're
facing similar cost pressures that others are seeing related to excess inventory, fuel prices, and supply chain, but
our business model is structurally sound and our market position is strong. As the year has progressed, we've
seen more pronounced consumer shifts and trade down activity. As an example, instead of deli meats at higher
price points, customers are increasing purchases of hot dogs as well as canned tuna or chicken. Private brand
penetration has also inflected higher, and in food categories specifically, the private brand growth rate doubled
compared to Q1 levels. We'll continue to manage pricing for customers in a way that preserves our price gaps
and allows us to earn market share profitably.
We've been very focused on managing controllable costs and consequently achieved expense leverage across all
three segments in Q2, even though we haven't fully lapped the wage investments implemented last year. During
the quarter, we also made progress reducing inventory, managing prices to reflect certain supply chain costs and
inflation, and reducing storage costs associated with the backlog of shipping containers.
We're encouraged by the initial steps taken by some suppliers to help us reduce product acquisition cost. We've
taken similar steps to manage our support and overhead costs too, and we're achieving significant savings in
procurement of goods not for resale. In our stores, fulfillment and distribution centers, we've seen labor
productivity metrics improve. We're finding efficiencies and reducing expenses while still focusing on operational
excellence.
I want to spend a moment discussing inventory. As a backdrop, the shifts that we've seen in consumer behavior
through the pandemic shifting from in-store to online along with big swings in the purchase of goods versus
services and then the reversion back to pre-pandemic norms have been sharp and difficult to predict. These
trends have been exacerbated by inflationary pressure on the consumer that many of us have not experienced in
our lifetime, the effect of which has recently changed consumption patterns in certain categories for us, notably
general merchandise. The result of all of this put pressure on our inventory levels that peaked in the last quarter.
Importantly, the team has a deep understanding of our inventory levels and content and have made a lot of
progress during the last quarter. In-stock levels have improved about 250 basis points since Q1 in our grocery
business alone despite the heavy sales volumes we're experiencing. We also made progress selling through
excess inventory, especially in hardline categories.
At the end of Q2, Walmart US inventory growth was 26% versus last year, reflecting over 750 basis points of
improvement from Q1 levels. Notably, about 40% of the year-over-year increase relates to inflation. General
merchandise inventory growth rates are down more than 15 percentage points from Q1 but still with more work to
do. We've cleared most summer seasonal inventory, but we're still focused on reducing exposure to other areas
such as electronics, home and sporting goods. We've also canceled billions of dollars in orders to help align
inventory levels with expected demand. We estimate that only about 15% of our total inventory growth in Q2 is
still above optimal levels, and our actions in Q3 will allow us to make significant progress toward rationalizing
absolute levels and mix, which will enable our stores to be well positioned ahead of the holiday season.
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Q2 2023 Earnings Call 16-Aug-2022
Despite the short term challenges we're facing this year, we continue to advance our flywheel strategy and
diversify our income strengths. For example, the global advertising business grew nearly 30% in Q2 led by
Walmart Connect and Flipkart as new advertisers turn to Walmart to deepen relationships with customers. We
now have over 240 million items in our US eCommerce assortment, and our marketplace seller count has
increased about 60% year-over-year. We continue to sign on more customers to our Data Ventures offering, and
the number of Walmart+ memberships continues to grow.
We're also excited about the build-out of automation and technology throughout our business and how it will
continue to help drive greater efficiency. Through my first couple of months here, I've been able to get out and
visit our stores and see our distribution and fulfillment centers and witness the supply chain automation and
technology that we're putting in our stores and centers. One example is the VizPick technology that we've rolled
out to our associates across US stores. This tool uses augmented reality to speed the inventory management
process, enabling associates to get needed product from the back room to the sales floor more efficiently. This
not only saves associate time but also helps avoid missing sales through side counter out-of-stocks. It's a win-win.
In summary, our business is resilient, and with the omni capabilities we've built, we're better positioned now than
we were in prior periods of economic softness.
Now, let's get to some additional Q2 financial details. As mentioned previously, each of our segments delivered
strong sales growth. Walmart US comp sales accelerated to 6.5% growth, reflecting strong grocery sales and a
higher average ticket size. International constant currency sales were up 9.9% with strength in Mexico, Canada
and China, while Sam's Club US delivered comps of 10% excluding fuel and tobacco.
Consolidated gross margin rate decreased 132 basis points, reflecting increased markdowns and unfavorable mix
shifts in our US businesses. Sam's Club gross profit was also negatively affected by a LIFO charge due to higher
inflation.
On the expense side, selling, general and administrative expenses leveraged 45 basis points, helped by higher
sales, partially offset by the US wage investments implemented last year. Operating income decreased 6.8% and
adjusted EPS was $1.77.
Two discrete items positively affected our results. Operating income benefited from a favorable insurance
settlement of $173 million during the quarter. Adjusted EPS also benefited from this as well as a $182 million
special dividend from one of our equity investments.
Operating cash flow was $9.2 billion, reflecting lower operating income, higher inventory amounts due in part to
inflation and the timing of certain payments.
During the quarter, we returned $4.9 billion to shareholders through dividend and share repurchase. Through Q2,
we are ahead of pace on our original share repurchase plan for this year and now expect to repurchase $10
billion to $11 billion in shares for fiscal year 2023.
Now, let's discuss segment results.
Walmart US comp sales momentum continued with growth excluding fuel of 11.7% on a two-year stack. Food
sales were especially strong with mid-teens growth, while general merchandise sales were soft, particularly in
electronics, apparel and home. Transactions increased 1%, while average ticket increased 5.5%. We were
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Q2 2023 Earnings Call 16-Aug-2022
pleased to see eCommerce sales growth improve sequentially, up 12% year-over-year in Q2 and 18% on a two-
year stack.
SG&A expenses leveraged 21 basis points, reflecting higher sales and lower COVID costs, partially offset by the
wage investments. The team did a nice job pivoting the expense structure so the scheduling challenges from Q1
did not repeat. Gross margin pressure led to a decline in operating income of about 7%.
International had another really good quarter. Sales were strong, up 9.9% in constant currency. Currency
headwinds negatively affected reported sales results by about $1 billion. Each of our major markets delivered
positive comp sales with Mexico and China leading the way. eCommerce sales on a constant currency basis grew
15% on top of strong gains last year.
Comp sales in Mexico increased nearly 11% with strong growth in stores as well as eCommerce sales which
grew 18%. The team is doing a good job reinforcing our price message and positioning as customers manage
through this inflationary period.
In China, comp sales were up more than 14% with strong growth in eCommerce sales which increased 77% in
the quarter and more than 150% on a two-year stack. eCommerce penetration continues to climb in both our
Sam's Clubs and Hypermarket stores as customers increasingly choose omni solutions to meet their shopping
needs.
Canada comp sales increased more than 10%, even as higher levels of inflation are starting to pressure
consumer spending in discretionary and general merchandise categories.
Flipkart continues to meet our expectations, and the team is gearing up for Big Billion Days. I traveled to India last
month and was impressed by how the Flipkart and PhonePe teams are innovating for the customer and driving
growth. PhonePe continued to see strong growth with annualized TPV of over $830 billion, reaching a record level
of monthly transactions of about 3.1 billion.
International operating income in constant currency increased more than 28%, partially attributable to the
previously mentioned insurance recovery for prior operational disruptions in Chile.
Sam's Club had another strong sales quarter with comp sales up 10% excluding fuel and tobacco, an increase of
more than 20% on a two-year stack. Transactions increased 9.8%. eCommerce sales grew 25% with strong
contributions from both curbside and ship-to-home orders.
Membership income was up nearly 9% with another record high quarter in overall member counts and continued
growth in Plus member penetration. Sam's added more new members in Q2 than any other quarter in recent
years, benefiting from membership campaigns.
Sam's leveraged expenses 131 basis points including fuel and 72 basis points excluding fuel, due primarily to
higher sales and lower COVID costs, but gross margins were down as elevated markdowns, supply chain and
fulfillment costs, and a 70 basis point inflation-related LIFO charge pressured profitability. As a result, operating
income declined about 35%.
Now, let's turn to guidance. With the updated financial guidance we released last month, we outlined the
pressures that led us to take a more conservative outlook for the current year profitability. Let me take a minute to
provide you with more detail.
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Q2 2023 Earnings Call 16-Aug-2022
When we provided guidance three months ago, we didn't expect food and fuel inflation to accelerate to the levels
that we experienced in Q2. In fact, Walmart US food inflation was up double digits year-over-year, and we saw a
nearly 400 basis point step-up as the quarter progressed compared to levels at the end of Q1.
The rising costs for essential items and customers' reprioritization of spending led to significant mix shifts in our
business. Grocery sales mix increased nearly 300 basis points, whereas general merchandise sales mix
decreased more than 350 basis points. This resulted in additional general merchandise markdowns in our US
business, particularly in apparel, at a time when inventory clearance was already higher than expected in the
industry. Higher fuel prices also pressured our supply chain expense.
We finished the quarter on a strong note, however, and ahead of our updated Q2 guidance provided last month,
and the Q3 back-to-school season is off to a solid start. Contributing factors to the better performance included
strong sales at the end of the month with good flow-through to the bottom line and lower than expected supply
chain costs.
We're taking additional pricing actions in Q3 to improve inventory levels in the back half of the year, and we've
built in more conservative category mix assumptions within our guidance. Our sales and profit view reflects trends
we've seen year-to-date as well as the uncertainty around inflation and consumer spending in the coming
quarters.
We've updated our fiscal year 2023 guidance to reflect the better Q2 results versus the guidance we provided in
July. We continued to believe the sales and profit guidance we provided at the time for the back half of the year
appropriately reflects elevated uncertainty in this environment and is our best view of expected performance.
For Q3, we expect net sales growth of about 5%, including comp sales growth of about 3% for Walmart US. We're
expecting operating income to decline 8% to 10% and adjusted EPS to decline 9% to 11%. For fiscal year 2023,
we expect net sales growth of about 4.5% including comp sales growth of about 4% for Walmart US. We expect
adjusted operating income and EPS to decline 9% to 11%. Excluding the effect of divestitures, this would
translate into net sales growth of 5.5% and a decline in adjusted operating income and EPS of 8% to 10%.
Before I close, I'd like to share my perspective as someone that is new to Walmart and meeting many of you for
the first time. I'm excited to join the company at such an opportunistic and transformational time. Certainly, retail
broadly is being pressured right now, but that shouldn't detract from the incredible opportunity that we have in
front of us. It starts with our mission of helping people save money so they can live better. We do that every day
at a scale that is unmatched by helping people be able to buy the things that they want and they need. This
mission permeates our culture and everything that we do.
I've joined an exceptional leadership team. Their history of operational excellence, their strategy, the drive to win
is simply something that I wanted to be a part of, and you combine that with the resources we have and the
investments we're making in things like supply chain automation, improving our eCommerce capabilities, and
diversifying our portfolio with higher margin products and services like data and advertising, that will result in more
durable earnings streams as they scale.
We have the potential to not only be relevant in the next chapter of retail but help define it, and when we execute
on these things, we have the ability to appreciably increase our shareholder value over time. I believe that some
of the best days of Walmart are in front of us. I look forward to working with you.
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Q2 2023 Earnings Call 16-Aug-2022
And now, we'd be happy to take any of your questions. Thank you.
QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] Thank you. Our first question is from the line of Bob Drbul with Guggenheim
Securities. Please go ahead with your question.
.....................................................................................................................................................................................................................................................................
Robert Drbul
Analyst, Guggenheim Securities LLC Q
Good morning. And John David, welcome. Congratulations.
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John David Rainey
Chief Financial Officer & Executive Vice President, Walmart, Inc. A
Thank you.
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Robert Drbul
Analyst, Guggenheim Securities LLC Q
I have maybe two quick questions, if I could. The first one, I think, Doug, you mentioned that sort of middle and
higher income shoppers are choosing Walmart. Just wondering if you can elaborate some more on the trade into
Walmart that is allowing you to take market share in grocery.
And the second question is just wondering if you could give us a little bit more flavor on what you saw sort of with
sales late in the quarter and what you're really seeing so far early Q3. Thanks.
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C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc. A
Yeah. Hi, Bob. This is Doug. I'll kick it off and then ask John to comment. In the Walmart US business, we have
seen mid to higher income customers come to Walmart looking for value. As you would expect, food and
consumables in particular are places where they're looking to save some money. That's not a total surprise. I
think the strength of it is encouraging. And as it relates to the end of the quarter, there were several things going
on. Fuel prices started to move a little bit. Back-to-school was strong, and then this income phenomenon that you
pointed to also provided some strength to the last week or so of the last month of the quarter, which is a little
different than the pattern that we had seen in the first two months of the quarter.
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John R. Furner
President & Chief Executive Officer-Walmart U.S., Walmart, Inc. A
Yeah, Doug. It was a bit different than May and June for sure, and it has led to the beginning of Q3 being stronger
in places like back-to-school, food and consumables continue their momentum, and I think the big [ph] notably
(00:28:58) change in late Q2, early Q3 was traffic count was a bit stronger than we had seen in the preceding two
months.
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C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc. A
We were laughing before the call started today about some of the anecdotal stuff that's going on. It won't surprise
you that backpacks are strong, for example, but it does surprise us how strong men's flannel is. And we've got a
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Q2 2023 Earnings Call 16-Aug-2022
program that's just under $12. I bought two of them personally, and it's a great value. And at the same time, some
of our clearance price points have gotten really low. We're trying to work through what we would call season code
2 apparel, and we've got new stuff selling well. So, it's almost like you can point to different areas to kind of make
the case for what you want the sales story to be.
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Operator: Thank you. Our next question is from the line of Kate McShane with Goldman Sachs. Please proceed
with your question.
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Kate McShane
Analyst, Goldman Sachs & Co. LLC Q
Hi. Good morning. Thanks for taking our question. Our question is centered around markdowns. We're curious if
the level of markdowns that plan to be taken in Q3 will be at a similar level as what you did for Q2. And it sounds
like inventory will be much cleaner by Q4, but it seems like there's still a lot of inventory in the industry and the
consumer that might need to be motivated by promotions given the amount of inflation. How should we think
about the markdown environment then in Q4 even in the context of cleaner inventory at Walmart?
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C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc. A
Hey, Kate. This is Doug. Thanks for the question. I think what we should do is hear from all three segments as it
relates to that. We've made progress. John, why don't you go first? But let's also hear from Kath and from Judith.
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John R. Furner
President & Chief Executive Officer-Walmart U.S., Walmart, Inc. A
Good morning, Kate. Start with the second quarter. From the end of Q1, at the end of Q2, there was some definite
progress in inventory, about 750 basis points of improvement. We viewed Q2 as being most urgent to clear
through apparel and summer seasonal that we needed out of the way and sold before Q3 really began to arrive.
We certainly made progress in apparel. There's more work to be done in inventory in general with a 25% increase
and about 40% of that inflation. And the remaining does two things. One, it helps us in terms of in-stock, we were
out-of-stock last year all throughout the year, so we have made improvements on in-stock. I think our results in
many categories reflect improvements and availability of in-stock, but then there is some backlog that we
continued to work through. At the end of Q1, we said this would take a couple quarters to work through. I would
just reiterate that, that remains true, and we'll continue to leave room to make sure that we manage our inventory
levels well and head into a position in Q4 in the end of the year that we'll be proud of.
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C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc. A
I think the fact that we were so lean last year, combined with how much inflation impacted the number, has kind of
been lost in the story a bit. It's true that we've got too much inventory, and that created markdown pressure,
particularly in Walmart US apparel. But when we look at the overall inventories, as John David has already
commented today, it's not like the vast majority of it is merchandise that we didn't want, we just were turning
goods a year ago and the year before that, frankly, at such a high level that we needed that inventory just to fill
side counters and to fill our features.
.....................................................................................................................................................................................................................................................................
John R. Furner
President & Chief Executive Officer-Walmart U.S., Walmart, Inc. A
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Q2 2023 Earnings Call 16-Aug-2022
That's right. In 2020, 2021, we would have had record sell-throughs in seasonal categories with very few
markdowns at the end of season. And so, of course, there is some normalization to get back to where we might
have been before the pandemic began, but again, we still need some time to work through the remaining excess
inventory.
.....................................................................................................................................................................................................................................................................
C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc. A
We're repeating ourselves, but the level of and the pace at which inflation changed in the first quarter and that
continued in food and consumables into the second just caused behavior to flip fast, and that caused apparel to
be more difficult than what we anticipated. And that's where the dollars markdown pressure came from.
Kath, you want to go next?
.....................................................................................................................................................................................................................................................................
Kathryn J. McLay
President & Chief Executive Officer-Sam’s Club, Walmart, Inc. A
Yeah. Really to say, if I look at our inventory position at the moment, for the last two years like we talked about,
we've had 10 quarters of double digit comps. For the last two years, we've struggled to stay in front of having
enough inventory. And then so, we're off a deflated base when you look at what our current position is. This year
then also you have the contraction with inflation, but what we're seeing is that we've got really good quality
inventory. We're really happy with what the seasonal sets we've got. Halloween looks fantastic. Back-to-school,
back to college has been good. Tailgating has been great. I think what I would say is in our number in this quarter,
a portion of it has been markdowns and a portion it is actually in inventory reserve, because we wanted to get in
front of it and just make sure that we put aside the money for Q3 so that we can have a really strong Q3 kind of
result. So, that's how we've addressed markdowns in Q2.
Now as for International, we felt some good progress on inventory quarter-on-quarter, some of that helped by the
FX position on that but underlying as well. I think as I look at it, about 75% of our increase year-on-year is
absolutely planned for. You heard that leanness that we had last year is really coming through, and I think that's
the theme for everybody. We just didn't have enough inventory at that time. That means about 25% of it, which is
some GM categories in a couple of markets specifically which would be Chile and Canada, but I'm very
comfortable with the way that the markets have dealt with that. And just as a reminder for at least Chile, our
quarter end is a month earlier than the enterprise quarter end, so we're already seeing some of that clearance
happening for that market.
.....................................................................................................................................................................................................................................................................
Operator: The next question comes from the line of Peter Benedict with Baird. Please proceed with your
question.
.....................................................................................................................................................................................................................................................................
Peter Sloan Benedict
Analyst, Robert W. Baird & Co., Inc. Q
Hi. Good morning, guys. Thanks for taking the question. Just want to talk a little bit about grocery, the strength
there, particularly in food. Can you talk about pricing, how you're managing that? I know units, it looks like they
were down for the quarter but improving to, I guess, flattish as you exited the quarter. Just how are you thinking
about pricing relative to units? What's the promotional environment you're seeing within grocery? And just how
the grocery strength is split in-store versus online and curbside? Thank you.
.....................................................................................................................................................................................................................................................................
John R. Furner
President & Chief Executive Officer-Walmart U.S., Walmart, Inc. A
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Q2 2023 Earnings Call 16-Aug-2022
Hey. Good morning, Peter. It's John. Let me take your question and in parts for just a second here. I mean, first,
value is always top-of-mind when it comes to us and deciding how we want to serve customers. So, we'll always
lean on the value for the customers above other things, and what we want to do and what we try to do throughout
this entire period is go up as late as possible. We certainly have been passing prices through. When we see
things like landed cost of goods going up, those have to be passed through. We're managing our supply costs as
well as we can. Units did strengthen throughout the quarter, particularly in July, late July. I think you heard that
earlier. So, seeing some positive units there was refreshing given how we had started the quarter. Fuel prices
were coming down, so we think that could have had some of an impact as well.
In terms of the market, we're really focused on Every Day Low Price. We have a strong rollback campaign all
across the store which would include food, consumables and general merchandise. And then in general just
across the food categories, our availability improvements I think you can see in-stores more consistently and
across categories. You'll remember this time last year we had pockets of out-of-stocks that kept emerging, the
only one that we really faced in the second quarter in a big way was baby formula which is now improving.
.....................................................................................................................................................................................................................................................................
C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc. A
The unit story is, one, the transaction count being up a little in this environment is also important to call out. The
average basket was way up, but it's great to see transactions grow in the Walmart US business also.
.....................................................................................................................................................................................................................................................................
Operator: Thank you. Our next question is from the line of Steph Wissink with Jefferies. Please proceed with
your question.
.....................................................................................................................................................................................................................................................................
Stephanie Wissink
Analyst, Jefferies LLC Q
Thank you. Good day, everyone. I wanted to follow up, Doug, on your comments regarding how the basket is
shifting for consumers. I think you mentioned in the proteins category, and even some areas of private label
strengthening. Maybe take us into the household budgeting that you're seeing with respect to your transaction
structure. And then as I'm looking at your guidance for the back half, maybe a follow-up would be what you're
assuming in terms of the basket composition by class of good or even within private label versus national brand.
Thank you so much.
.....................................................................................................................................................................................................................................................................
C. Douglas McMillon
President, Chief Executive Officer & Director, Walmart, Inc. A
John, you jump in here too. I think what you should take away from Q3 and Q4 guidance is that we're expecting
the environment to look a lot like Q2. And as it relates to the choices people are making, I think I'd call out John's
variety. Like, you've got all kinds of income levels shopping in different ways, and we've seen strength in some
categories that's really encouraging. For those that are under the most pressure, that are most price sensitive,
private brands are stronger, pack sizes are different, opening price points. John, you might talk a little bit about
what you saw at the holiday meeting, looking ahead for things like the Thanksgiving Meal. The team's done a
great job of protecting opening price points for people that are most price conscious.
.....................................................................................................................................................................................................................................................................
John R. Furner
President & Chief Executive Officer-Walmart U.S., Walmart, Inc. A
Yeah, Steph. Thinking back one of the meetings we had in New York in 2020. We talked a lot about serving
customers flexibly as we developed different businesses. And so just to tag on to Doug's comments, serving
customers in-store is something we have prided ourselves on a long time, our pickup business continues to grow,
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Q2 2023 Earnings Call 16-Aug-2022
our delivery is growing with Walmart+. So, the variety of ways that we can serve customers I think has been
helpful, especially given the number of shifts customers have had in their lives the last couple of years from
working at home and then in many cases back out into the workplace. So as customers change, we can serve
them in a number of ways. When you then click into products, our wide portfolio of products both in eCommerce
and in-stores, including the numbers you heard from John David earlier in the marketplace, give us the ability to
serve a wide range of customers.
And then as Doug mentioned last week, we had all of our managers together in Denver, which is always a fun,
exciting experience to get the team together. But what I heard consistently is the team is doing a very nice job
balancing out how to improve quality and sell higher price points and remaining focused on opening price points.
So, having Thanksgiving Meals in a position where you can buy an entire meal for under $50 for a family of four is
exciting. So, there's a value play. There's a quality play. And wherever the customer goes and how things shifts,
we'll be ready to serve them. And we're building the capabilities to be able to do that at will.
.....................................................................................................................................................................................................................................................................
John David Rainey
Chief Financial Officer & Executive Vice President, Walmart, Inc. A
Steph, I would just add. This is John David. As it relates to our guidance in the back half of the year, the swings
that we've seen in consumer behavior have been difficult to predict, and the pace at which they've happened has
been sharp. So, our guidance for the back half really just assumes no change in what we're seeing in the second
quarter in terms of mix changes in our business.
.....................................................................................................................................................................................................................................................................
Operator: Thank you. Our next question is from the line of Michael Lasser with UBS. Please proceed with your
question.
.....................................................................................................................................................................................................................................................................
Michael Lasser
Analyst, UBS Securities LLC Q
Good morning. Thanks a lot for taking my questions. Welcome, John David.
.....................................................................................................................................................................................................................................................................
John David Rainey
Chief Financial Officer & Executive Vice President, Walmart, Inc. A
Thank you.
.....................................................................................................................................................................................................................................................................
Michael Lasser
Analyst, UBS Securities LLC Q
Walmart has been experiencing some discrete and arguably temporary factors that are weighing on its profitability
this year, including staffing issues in 1Q and the well-documented inventory issues. So, looking towards next year
when some of these inflationary cost pressures are going to seemingly roll back and you'll have moved through
some of the challenges and the underlying drivers of the alternative operating profit growth should continue, why
wouldn't Walmart be in a position to generate growth above its long term algorithm in 2023?
.....................................................................................................................................................................................................................................................................
John David Rainey
Chief Financial Officer & Executive Vice President, Walmart, Inc. A
Sure. I'll take that, Michael. Thanks for the question. You're right. Certainly, we've incurred some costs this year
that are more, call it, one-time in nature related to the supply chain and higher inflation, but it's difficult to predict
how long that will persist. Certainly, the inventory situation has gotten better, but the effect on the mix changes in
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Q2 2023 Earnings Call 16-Aug-2022
our business are largely the result of higher inflation. And that may persist for some time, so we're being cautious
with respect to the outlook. We're obviously not giving guidance for next year right now, but look what I'd point you
to is the conviction that we have in our long term plan has not changed, has not wavered. When you look at the
long term plan that was laid out by the management team previously in terms of what we're doing with the
flywheel strategy, the ability to grow operating income faster than revenue, and you look at that over a multiyear
basis, we have as much conviction today as we did when we laid that out. So, very excited about the future, but
the short term period, this is a moment in time. And we're being cautious with respect to the outlook because
there's a lot that we don't know.
.....................................................................................................................................................................................................................................................................
Operator: Thank you. Our next question is from the line of Edward Yruma with Piper Sandler. Please proceed
with your question.
.....................................................................................................................................................................................................................................................................
Edward Yruma
Analyst, Piper Sandler & Co. Q
Hey. Good morning. Thanks for taking the question. John David, curious on your perspective given your most
recent stop on Walmart's advertising and fintech businesses. I know you have a lot of experience from PayPal on
that. How do you assess kind of where they are at today? And kind of how do you think about their longer term
growth opportunity? Thank you.
.....................................................................................................................................................................................................................................................................
John David Rainey
Chief Financial Officer & Executive Vice President, Walmart, Inc. A
Sure. Appreciate the question. Well, certainly I am a believer in what's happening in digital payments, fintech
broadly, and the secular tailwinds that exist there with consumer behavior moving more digital, more online. And if
you look at the investments that Walmart has been making, they're in those areas, whether it's expanding their
eCommerce capabilities, their marketplaces, even getting into financial services. As I have an early peek into
what the company is doing, I've got to say I'm very impressed with the broad capabilities and the resources
devoted to this. And so, I think it's a huge opportunity for Walmart going forward and frankly one of the reasons
that I'm so excited to be part of this and help shape this outcome.
.....................................................................................................................................................................................................................................................................
Judith McKenna
President & Chief Executive Officer-Walmart International, Walmart, Inc. A
Maybe it's worth adding on financial services, PhonePe in India. You heard that we were there recently, and, John
David, you were there with us as well and got to visit the business. It was – you'll have seen from the scripts that
we had today that they grew their annualized TPV to $830 billion. Last quarter, that was $770 billion. So, really
good progress there. And they've also now got monthly transactions of $3.1 billion a month, which is incredible. I
think what's really encouraging with the way they're approaching this space is they're looking not only at
payments but also at merchant services, and that two-sided network is an important part of that. But equally
starting to expand into financial service as well with a real focus at the moment on insurance and pushing that.
And their knowledge and their ability to share that knowledge around the world and help other markets such as
Mexico from best practices, what the they should be looking at, has been incredibly invaluable and one of the real
benefits of being a global company.
.....................................................................................................................................................................................................................................................................
John David Rainey
Chief Financial Officer & Executive Vice President, Walmart, Inc. A
I'll just add, Judith, that I share the excitement that we all have when we went to India and met with the team. To
put it in perspective what PhonePe is doing, if you look at the largest digital payments companies outside of China
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